Dow Spotlight Stock of the Week: American Express


In October 2012, the Dow Jones Industrial Average's only credit card company, American Express , and the index's largest retailer, Wal-Mart teamed up to release a prepaid debit card, called Bluebird. It was marketed to those who wanted an alternative to a traditional checking account but the convenience of a debit card.

Photo: Wal-Mart.

At the time it was released, Bluebird had no monthly, annual, or overdraft fees, carried no minimum balance requirements, had the capability for direct deposit, could be used at an ATM, and had a smartphone app that card holders could use to pay bills. As of Tuesday, the card gained some new features, the most important of which is that it's now FDIC insured. Even though American Express is a very strong and stable company, many Americans have been leery of the large institutions in its sector ever since the financial crisis hit. Now, since the card's funds are protected by the government, consumers may more widely accept it

Before the most recent changes, 575,000 account holders had already loaded $275 million onto the card. Of those accounts, 85% of them are new to American Express. That means there are more than 488,000 new opportunities for American Express to make money here. It certainly stands to make some decent money on transaction charges, which are usually 2% of the total purchase price. That may not sound like much -- and when you consider that MasterCard processed 34 billion transactions last year alone, it really isn't -- but for every $50 purchase those 575,000 Bluebird members make, AmEx takes in $1.

Perhaps just as important to AmEx is that Bluebird essentially poses very little risk. Credit card companies take on a huge amount of risk when they lend. Consider that AmEx's most recent quarterly statement showed that the credit card side of the business had more than $431 million in loans to cardholders that were more than 90 days outstanding, and that the company's current write-off percentage is 2.1%. But since Bluebird is prepaid, AmEx's risk is essentially zero while offering a massive potential for upside gain.

Furthermore, I believe American Express is currently the best option for those looking to invest in the industry. Compared with Visa or MasterCard, I believe American Express has the most potential for future growth, while offering the lowest risk. At a price-to-earnings ratio of just 17, compared with Visa's 47 or MasterCard's 24, AmEx is also the cheapest stock at today's prices.

American Express also pays a solid dividend, and with its current yield of 1.2%, it easily beats Visa's dividend yield of 0.8% and crushes MasterCard's 0.4%.

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Fool contributor Matt Thalman has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa and owns shares of MasterCard. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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